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Notice

Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change Modifying Its Quote Mitigation Plan and Amending Rule 970NY and Rule 970.1NY

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Start Preamble October 15, 2014.

Pursuant to Section 19(b)(1) [1] of the Securities Exchange Act of 1934 (the “Act”) [2] and Rule 19b-4 thereunder,[3] notice is hereby given that, on October 2, 2014, NYSE MKT LLC (the “Exchange” or “NYSE MKT”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change

The Exchange proposes to modify its quote mitigation plan and to amend Rule 970NY (Firm Quotes) and Rule 970.1NY(Quote Mitigation). The text of the proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange is proposing to modify its quote mitigation plan and to amend Rule 970NY (Firm Quotes) and Rule 970.1NY (Quote Mitigation). As discussed below, the Exchange believes the modified quote mitigation plan will adequately accommodate the number of quotations sent to the Exchange and the message traffic that the Exchange sends to the Options Price Reporting Authority (“OPRA”).

Rule 970.1NY

In connection with the adoption of the Penny Pilot Program, the Exchange adopted a quote mitigation plan designed to reduce the number of quotations generated by the Exchange for all options traded on the Exchange, not just issues included in the Penny Pilot Program.[4] The current plan reduces the number of messages the Exchange sends to OPRA by only submitting quote messages for “active” series. Rule 970.1NY defines active series as: (i) The series has traded on any options exchange in the previous 14 calendar days; or, (ii) the series is solely listed on the Exchange; or (iii) the series has been trading ten days or less, or; (iv) the Exchange has an order in the series. Alternatively, the Exchange may define a series as active on an intraday basis if: (i) The series trades at any options exchange; (ii) the Exchange receives an order in the series; or (iii) the Exchange receives a request for quote from a Customer in that series.

The Exchange believes it no longer needs the quote mitigation provided by Rule 970.1NY because rules adopted since Rule 970.1NY provide sufficient quote mitigation.

Current Market Structure and Controls on the Exchange

In 2010, the Exchange incorporated select provisions of the Options Listing Procedures Plan (“OLPP”) in Rule 903A as a quote mitigation strategy.[5]

The OLPP is a national market system plan that, among other things, sets forth procedures governing the listing of new options series. From the OLPP, the Exchange incorporated in Rule 903A “applied uniform standards to the range of options series exercise (or strike) prices available for trading on the [Exchange] as a quote mitigation strategy.” [6] In approving the OLPP provisions, subsequently incorporated in Rule 903A, the Commission indicated that “adopting uniform standards to the range of options series exercise (or strike) prices available for trading on the [Exchange] should reduce the number of option series available for trading, and thus should reduce increases in the options quote message traffic because market participants will not be submitting quotes in those series.” [7]

One year after adopting select provisions of the OLPP, the Exchange refined the quoting obligations applicable to Market Makers as a quote mitigation strategy.[8] Specifically, the Exchange adopted Commentary .01 to Rule 925.1NY, which states that Specialists' and Market Makers' continuous quoting obligations “shall not apply to Market Makers with respect to adjusted option series, and series Start Printed Page 63010with a time to expiration of nine months or greater, for options on equities and Exchange Traded Fund Shares, and series with a time to expiration of twelve months or greater for Index options.” [9] Because there are no Market Maker quoting obligations associated with adjusted options series, there is a reduction in quote traffic that is sent to OPRA. Indeed, in approving Commentary .01 to Rule 925.1NY, the Commission noted, “. . . the Exchange's proposal would reduce the burden on market makers to submit continuous quotes that the Exchange may not submit to OPRA.” [10]

The Exchange believes that reliance on the OLPP, via Rule 903A, together with the refined Market Maker quoting obligations, pursuant to Commentary .01 to Rule 925.1NY, is sufficient as a quote mitigation strategy and obviates the need for Rule 970.1NY. The Exchange believes that limiting the number of series listed on the Exchange is preferable to suppressing quotes of inactive series, as required under current Rule 970.1NY, because all quotes sent by Market Makers are actionable even if not displayed.

The Exchange believes that both its own systems capacity and OPRA's systems capacity are more than sufficient to accommodate any additional increase in quote traffic that might be sent to OPRA as a result of the deletion of Rule 970.1NY. The Exchange has already successfully conducted testing to ensure that its internal systems are equipped to handle any increase in quote traffic as a result of the proposed rule change. Further, the Exchange continually assesses its capacity needs and ensures that the capacity that it requests from OPRA is not only sufficient but also compliant with the requirements established in the OPRA Capacity Guidelines.[11] In submitting its capacity requests, the Exchange has factored in the impact on capacity if all series currently subject to Rule 970.1NY were to become active and therefore sent to OPRA.[12]

In addition, the Exchange has in place the following measures that it believes serve as additional safeguards against excessive quoting:

—Monitoring: The Exchange actively monitors the quotation activity of its Market Makers. When the Exchange detects that a Market Maker is disseminating an unusual number of quotes, the Exchange contacts that Market Maker and alerts it to such activity. Such monitoring may reveal that the Market Maker may have internal system issues or has incorrectly set system parameters that were not immediately apparent. Alerting a Market Maker to the heightened levels of activity will usually result in a change that reduces the number of quotes sent to the Exchange by the Market Maker.

—New Listings: The Exchange has a business plan with respect to the listing of options on new underlying securities that is designed to help ensure that any new listings are sufficiently active to avoid listing options on underlying securities that generate quote volume without the offsetting benefit of trading volume.[13]

—Excessive Bandwidth Utilization Fees: The Exchange imposes Excessive Bandwidth Utilization Fees, which are designed to encourage efficient quoting.[14] The Excessive Bandwidth Utilization Fees are comprised of Order To Trade Ratio Fees and Messages to Contracts Traded Ratio Fees.[15]

In connection with the foregoing, the Exchange proposes to amend paragraphs (b)(1) and (b)(2) of Rule 970NY to delete references to the “Quote Mitigation Plan,” which refer to the plan set forth in Rule 970.1NY. In addition, the Exchange proposes to delete Rule 970.1NY in its entirety, as it contains a discussion of the current quote mitigation plan.

Implementation

The Exchange will announce the implementation date of the proposed rule change by Trader Update to be published no later than 60 days following the effective date of this filing. The implementation date will be no later than 60 days following the issuance of the Trader Update.

2. Statutory Basis

The proposed rule change is consistent with Section 6(b) of the Act [16] in general and furthers the objectives of Section 6(b)(5) of the Act [17] in particular in that it should promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.

The Exchange believes that the proposed modifications to the quote mitigation plan, including the continued reliance on Rule 903A and Commentary .01 to Rule 925.1NY, together with the other safeguards mentioned above, would promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market as it would increase transparency and enhance price discovery as all Market Maker quotes would be reflected in the market. Specifically, the Exchange believes that deleting Rule 970.1NY will remove impediments to and perfect the mechanism of a free and open market and a national market system because it will enable all actionable Market Maker quotes to be displayed, including in inactive series. The Exchange believes this would also protect investors and the public interest because available Market Maker liquidity in all series would be publicly displayed, thereby putting investors on notice of such liquidity. The Exchange further believes that the market structure initiatives adopted in recent years serve to reduce the potential for excessive quoting because the OLPP limits the number of series eligible to be listed, which reduces the number of series for which a Market Maker would be obligated to quote, and therefore reduces quote traffic.

As discussed above, the Exchange believes that both its own systems capacity and OPRA's systems capacity are more than sufficient to accommodate any additional increase in quote traffic that might be sent to OPRA as a result of the proposed rule change.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose Start Printed Page 63011any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Specifically, as discussed above, the Exchange believes that any increase in quote traffic that might be sent to OPRA as a result of the proposed rule change should not impact any other exchange's capacity at OPRA.[18]

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

No written comments were solicited or received with respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

(A) By order approve or disapprove the proposed rule change, or

(B) institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

Paper Comments

  • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEMKT-2014-86. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/​rules/​sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEMKT-2014-86, and should be submitted on or before November 12, 2014.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[19]

Kevin M. O'Neill,

Deputy Secretary.

End Signature End Preamble

Footnotes

1.  15 U.S.C.78s(b)(1).

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4.  See Securities and Exchange Release No. 59472 (February 29, 2009), 74 FR 9843 (March 6, 2009) (SR-ALTR-2008-14); see also Securities and Exchange Release No. 55162 (January 24, 2007), 72 FR 4738 (February 1, 2007) (SR-Amex-2006-106) (original quote mitigation proposal).

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5.  See Securities and Exchange Release No. 61978 (April 23, 2010), 75 FR 22886 (April 30, 2010) (SR-NYSEAmex-2010-3). See also OLPP, available at, http://www.theocc.com/​clearing/​industry-services/​olpp.jsp.

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6.  Rule 903A codified Amendment No. 3 to the OLPP. See Securities and Exchange Release No. 60531 (August 19, 2009), 74 FR 43173 (File No. 4-443). See also Rule 903A.

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7.  Id., 74 FR at 43174.

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8.  See Securities and Exchange Release No. 65572 (October 14, 2011), 76 FR 65310 (October 20, 2011) (NYSEAmex-2011-61).

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9.  An “adjusted series” is “an option series wherein, as a result of a corporate action by the issuer of the underlying security, one option contract in the series represents the delivery of other than 100 shares of underlying stock or Exchange-Traded Fund Shares.” See Commentary .01 to Rule 925.1NY.

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10.  See supra n. 8, 79 FR at 65311.

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11.  See the OPRA Capacity Guidelines, available here, http://www.opradata.com/​pdf/​capacity_​guidelines.pdf.

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12.  OPRA has delegated certain functions pertaining to planning the capacity of the OPRA System to an Independent System Capacity Advisor (“ISCA”) that “may provide less than all of the capacity that has been requested if it determines (a) that the capacity requests of one or more of the parties are unreasonable, or (b) that it is not reasonable to develop or maintain a System that has capacity sufficient to satisfy the requests of the parties.” See id. The Exchange has never been informed by the ISCA that the capacity it has requested cannot be met for any reason, including because the ISCA had deemed the request to be unreasonable. Thus, the Exchange believes that any increase in quote traffic that might be sent to OPRA as a result of the current proposal should not impact any other exchange's capacity at OPRA.

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13.  See Commentary .09(b) to Rule 15.

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18.  See supra. n. 12.

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[FR Doc. 2014-24953 Filed 10-20-14; 8:45 am]

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